The Platform Economy

This phenomenon raises three broad questions: What are the economic dynamics behind these trends? What are the distributions of winners and losers from these trends? What are the new challenges for policy making raised by these trends?

Economic dynamics

The superficial and textbook economic dynamics underlying the platform economy are relatively simple. These platforms are able to create a competitive advantage for themselves because they reduce transaction costs and because they obtain greater economies of scale. Online retailing reduces the number of intermediaries (think slimmed down supply chains), does not need expensive physical retail real estate, is open 24/7, automates most transactions after an initial infrastructural investment (which itself is distributed over thousands of sellers) and facilitates a potentially global market reach. For the platform owner, skimming a percentage off each transaction adds up to tremendous revenue. For the seller, the ability to access a larger digital market with fewer intermediaries is attractive.

There are however more important economic dynamics which are occult. These relate to the financing of platforms and their spin-off benefits and effects. Many platforms are not economically competitive and subsidize their primary economic activity (the intermediation of goods and services) because they are vehicles to gather data and to test technologies. In India, Uber, for example, initially subsidized taxi rides in order to make their service more attractive. Partly this forces service providers to get on the platform and eventually helps the platform reach enormous scale, and subsequently pricing power. However, it is also the data which platform providers obtain from users that is in itself a tremendously valuable asset since it is the essential input into building the AI systems that are going to be at the forefront of technological development. Because of these occult assets, platform companies are able to obtain massive and cheap venture capital and thereby distort the competitive environment in their favour.

Winners and losers

For developing countries, the platform economy offers opportunities. Because legacy infrastructures are less developed (think retail space but also banking and credit facilitators), platform economies face little entrenched competition and are able to leapfrog and achieve scale faster and with fewer venture capital requirements. Lessons learned in home markets can then be leveraged into new markets and allow the emergence of southern innovators and, to use a term dear to the digital world, disruptors. Kenya’s M-Pesa is the most recognizable of such enterprises. Moreover, platform economies are suited to the low individual transaction values which characterize developing country economies because the marginal costs of individual transactions are much lower than in traditional retail. This facilitates greater volumes of and access to economic activity.

Nevertheless, the fundamental characteristics of platform economies will not facilitate decentralized development. The United States of course has the largest concentration of platform enterprises, but even in Asia platform enterprises are concentrated in China, with a few others scattered in India, Japan and South Korea. Within these countries, these enterprises are also concentrated in one or two cities. Uneven development will accelerate as governments and the private sector respond by diverting infrastructural and other investments to these areas and contentious urban planning challenges will appear as dense and expensive cities emerge and those in the platform economy outcompete those in other economic sectors for real estate.

The balance of economic power will shift in complex ways. The experience of Asian colonization makes it clear that when trading platforms are monopolized, wealth accrues not to the producers but to the distributors of goods. The East India companies of England and Holland made obscene profits because they monopolized and oppressed producers in Asia. Platforms, in order to make themselves attractive to customers, squeeze the margins for the retailers and producers who sell on them. This may result in increases in what economists call consumer surplus at the expense of producer surplus. This may indeed be characterized as a net positive as it will force producers to seek efficiency gains, but a less superficial analysis will reveal that ‘producers’ include labour, and labour’s purchasing powers will be depressed in favour of consumers who are often in wealthier countries or in wealthier groups of developing countries.

At the same time, the flexibility and lower entry costs into platform economies will help a certain class of labour, mainly younger people who are looking for gigs rather than full-time steady employment. Of course, some of these benefits will come at the expense of more stable work.

Platform economies will also appear to level the selling field. For example, Etsy may provide a marketplace for individual sellers, but digital real estate (popping up on the first or second search spaces) can be even more exclusive than physical real estate, which will inevitably lead to an increasing concentration of economic winners.

Policy challenges

As with all new technological revolutions, the platform economy promises great things but also introduces critical vulnerabilities. The monopolies it creates are bad, regardless of whether or not these monopolies yield lower consumer prices and increased convenience. They concentrate economic power and reduce corporate accountability. Moreover, the platform economy skews economic power towards venture capital, which often leads to predatory competition and different forms of labour exploitation.

Security aspects of the platform economy are under-emphasized. Large tech companies gather tremendous amounts of data and wealth globally and this data and the technologies they develop are utilized by military authorities. When corporations like Amazon, Google and Microsoft offer services to the US military, then in effect their global consumers are subsidizing and providing AI-relevant information to develop US military capabilities. Similar transfers of power and resources are made to Chinese military capabilities by the consumers of Alibaba and Huawei. Given these two countries host almost all the large platform economy enterprises, the rest of us risk becoming impotent and involuntarily co-opted participants in this bipolar geopolitical belligerence.

Of course, the platform economy creates winners, many winners, which is why it has many fans and is expanding rapidly. It is creating novel and original services and allowing innovation and market access to new and different players. But it is also threatening the creation of a global economic monoculture which is problematic. Given the wealth and size of these enterprises, it would be naïve to imagine public pressure will fundamentally change the regulatory environment under which they operate any time soon. At best, for now we can only begin to study and publicize the concerns and to raise awareness.